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PEER COMPANIES

The near 12 per cent fall in the rupee between January and August is hurting many in India Inc. For stock investors, the rupee’s roller-coaster ride over the last few weeks has added another layer of uncertainty in a market whose movements over the last few months have been as unpredictable as during any time in recent history. Experts predict that the rupee may slip further in the days to come. While some of the stocks of IT, pharma, textile and leather firms will benefit from a weaker currency, stocks of chemicals, engineering, electronics companies, among others, stand to lose from a weaker rupee. Here are the views of select brokerages on some of these stocks:

MOTILAL OSWAL

Key Beneficiaries

INFOSYS: Constant currency revenue growth guidance of 6-8 per cent and EBIT margin band of 22-24 per cent remain unchanged. This comes despite 20-25bps positive contribution from WongDoody acquisition and 100bps tailwind to margins from the currency. Although it looks like Infosys will achieve the lower end of its guidance in FY19, we continue to reckon the margin band is conservative, with the share of digital inching up, recent INR (rupee) depreciation, and investments already defined internally. Our price target of Rs 1,550 discounts forward earnings by 17x.
PERSISTENT SYSTEMS: One of the few Tier-II companies with the potential to grow revenues above the industry given the focus on enterprise digital transformation, Unlikelihood of obsolescence in its chosen segments over the medium to long term; and multi-year relationships, with marquee clientele in the ISV space. Credible experience in agile product development and iterative approach to product engineering, strong balance sheet and adequate pricing power with continued buoyancy in digital, stronger sales from IBM and success in investments made over the last few quarters bode well. Our price target of Rs 950 (15 per cent upside) discounts forward earnings by 16x.

Negatively Impacted

HPCL: Although there is room for a further improvement in the marketing margin on auto fuels, it remains to be seen to what extent the OMCs are able to regain their marketing margins —especially considering that a series of elections are scheduled over the coming months. HPCL is trading at 5x consolidated FY20E EPS and 5.4x FY20E EV/ EBTIDA. We value refining and marketing at 6x EV/EBITDA, and pipeline at 7.5x EV/ EBITDA. Rising oil prices, upcoming elections, no cut in excise, the rupee depreciation and threat of subsidy sharing in light of inadequate provisioning by the government are the main risks for the stock.

IIFL

Key Beneficiaries

HCL TECHNOLOGIES: India’s fourth-largest IT company is likely to see an improvement of 20 bps in EBIT on every 1 per cent change in USD. The hedging is only to the extent of 40 per cent. In addition, the company is expected to do well due to recovery in IMS, higher traction in ER&D segment and investments in IP partnerships. Target Price: Rs 1,300.

MM FORGINGS: The Chennai-based auto ancillary forgings company gets 59 per cent of its revenues from exports. Over the past 12 months, steel prices have appreciated 5 per cent (in rupee terms) while the currency has depreciated more than 11 per cent, leading to an expansion in margins. Additionally, robust growth in domestic commercial vehicle industry will drive growth. Target Price: Rs 800.

Negatively Impacted

REC: The company is likely to see some pressure due to its ECB exposure. ECBs stood at Rs 27,696 crore at the end of FY18, 14.3 per cent of total borrowings. The blended cost of funds for ECB borrowings stood at 5.3 per cent, 245bps lower than the blended cost for non-ECB borrowings. REC has already seen its NIM shrink 76bps YoY to 3.89 per cent in FY18. In FY18, 25 per cent of REC’s new debt was raised via ECB. Target Price: Rs 100.
CHAMBAL FERTILIZERS: The company is an agri-inputs player, has FCCB $ 463 million (52 per cent of the total borrowings as on March 31, 2018) for setting up of a new urea plant. The company deals in trading of imported fertilizers (DAP, NPK and MOP), which are imported (46 per cent of FY18 revenue).We expected a deterioration in outlook due to the rupee’s deprecation on repayment of ECB and higher import cost. Target Price: Rs 130

SHAREKHANKey Beneficiaries

TCS: We expect TCS earnings to grow at a CAGR of 14 per cent over FY18-FY20E, led by the recent large deal wins and recovery in BFS space. Further, the depreciation of the rupee would also support achieve its aspirational margin target of 26-28 per cent over FY19-20. We maintain our ‘Buy’ rating on the stock with a price target of Rs 2,200.

L&T INFOTECH: We believe LTI is well placed to deliver industry-leading revenue and earnings CAGR of 20 per cent and 22 per cent, respectively, over FY18-FY20E. The growth would be primarily driven by gaining shares from large customers, focus on large deal wins, higher digital revenue contribution and a dynamic leadership team. Further, strong return ratios, favourable delivery mix and currency tailwind make LTI an attractive bet for investors.

SUN PHARMA: Recent rupee depreciation will have a positive impact on export-driven pharma companies. Sun Pharma tends to benefit as ~70 per cent of its business is export oriented. Also, Sun Pharma is building a strong speciality pipeline (with 3-4 specaility launches already planned for FY19), and is one of the best-placed amongst large domestic players. In addition, clearance of the Halol plant lifted the gloom surrounding the stock.
Negatively ImpactedOIL MARKETING COMPANIES: We expect OMCs (IOCL, BPCL and HPCL) to get negatively impacted by the depreciation of the Indian rupee as their working capital requirement would be increased given their crude purchases are in US dollar. Moreover, the interest burden on US dollar-denominated loans would also go up along with forex losses in the P&L. We have a ‘Neutral’ view on IOCL and BPCL.